Court blocks Lloyds bid for C&G: Bank considers appeal or new offer after decision that cash payment to society members is unlawful

LLOYDS Bank and Cheltenham and Gloucester Building Society were last night forced back to the drawing board after their proposed pounds 1.8bn merger was blocked in the High Court.

The two were deciding whether to revamp their deal, announced in April, or to appeal against the judgment by Sir Donald Nicholls, the Vice-Chancellor, who said that payments to account holders of less than two years' standing were unlawful.

C&G said it might alter the terms of a bid by Lloyds so that it complied with the High Court ruling. 'We may be able to restructure the deal to make it consistent with the Act so an appeal may not be necessary,' said a spokeswoman. 'We haven't got a problem that can't be solved,' she added.

She said the judgment had not upheld the Building Societies Commission's view that payments from a third party were unlawful. It had also endorsed payments to depositors, pensions and staff if the voting members approved. 'If we can resolve the structure of the cash payments so they are within the terms of the Act it will be quicker than appealing.'

The stumbling block is payments averaging pounds 1,700 to the 226,000 voting members who have held accounts for less than two years. Under building society rules 75 per cent of shareholders voting have to approve the bid.

C&G believes it will find a way to satisfy these members, who are a small proportion of the 1.4 million customers who stand to gain from the takeover.

A new scheme could involve issuing some form of shares to C&G members.

Andrew Longhurst, chief executive of the C&G, Britain's sixth- largest society, said after the judgment: 'I am sure C&G's customers will be very disappointed at the judgment, not only because they were looking forward to the cash, but also to better service and interest rates.

'The benefits of the deal remain, both to the customers and the business, and we must consider the judgment before deciding whether to take this further in court or adjusting the scheme.'

Lloyds originally had a back-up plan involving preference shares for C&G customers, but this was abandoned as the courts may have looked on this scheme as an artificial device to the 1986 Building Societies Act. The Treasury said it was pleased that the High Court upheld its view of the law that the Building Societies Act ruled out cash payments to members of less than two years' standing in a takeover by a commercial company.

The Building Societies Commission, which regulates societies and brought the action, was delighted. A spokesman said: 'We are naturally pleased that the Vice- Chancellor has interpreted the two-year rule as we have so far believed it to be. If you can have a brief relationship as a member of a society and stand to gain a windfall, that is very unstable for building societies.'

A spokesman for Woolwich Building Society also welcomed the upholding of the rule. 'It is crucial. If it had been breached it would have allowed potentially destabilising flows of money.'

Chris Chadwick, a director of Leeds, said: 'Neither Lloyds nor the C&G are going to take their bats home. I think this is just round one. They must be disappointed, but they will be looking for a way to get around the setback they've suffered in court today.'

John Wriglesworth, building society analyst with stockbrokers UBS, said: 'There's no reason why they can't appeal and try to devise a new scheme at the same time.'